Acquisition finance is the terminology used within the financial industry to describe the range of different capital sources that a business can utilise to fund a merger or acquisition of another business.
Acquisition finance can be complex and can often involve an amalgamation of various financing products. Each deal is different and depending on the requirements the finance can be sourced from one provider or multiple providers. Ultimately, you just have to make sure that you structure the debt in the most efficient way possible.
The challenge that companies face when deciding on growth strategies and how to finance any acquisition is how to secure the appropriate mix of financing with the lowest cost of capital. It is this area of expertise where AW Capital can assist with their knowledge of the industry and various financing products.
What Are The Different Types of Acquisition Finance?
When it comes to deciding the best form of debt financing for an acquisition, a specialist corporate finance firm can provide advice and expertise on what is likely to be a complex and significant transaction. At AW Capital, we are always very keen to ensure that our clients have a comprehensive understanding of the various options available to them so that they can make an informed decision. Let’s look at some of the various acquisition finance options available to your business.
Stock Swap Transaction
While this type of financing is more common for listed companies, it is also used fairly often by private companies. The way stock swaps work is that the buyer would offer the seller a stake in the combined entity. The benefit to the buyer is they get to conserve cash flow and the benefit to the seller is a portion of a larger entity which has potential to grow quickly.
Acquisition Using Debt Funding (Leveraged Buyout)
This is a unique mix of equity and debt that is often used in the financing of an acquisition. It is one of the most commonly used types of acquisition finance. A leveraged buyout uses the assets of both companies, buying and the selling company as secured collateral. In some instances, where the buyer is not an established company, the transaction could be initiated by them as an individual or via a New Company (“New Co”), in this case because there is unlikely to be any significant assets available in the New Co, the buyer will probably have to fund a portion of the transaction through cash with the rest being financed.
In rare circumstances, it might even be possible to fund this transaction entirely through debt but a number of factors would be considered by the lender before they can provide the go ahead on such a deal.
For some deals, a buyer could ask the seller to finance the transaction; this could be done using a number of ways e.g. loan notes. Effectively, the buyer is asking the seller to assume the role of the lender. This type of transaction is often used for Management Buy-outs (MBOs).
Perhaps the easiest structure or acquisition finance is an all-cash acquisition deal. In layman’s terms, the purchaser exchanges cash for shares within the company they are buying. Cash transactions during an acquisition are popular because it allows the buyer to negotiate from a strong position and the seller gets cash without many complications.
Although there may seem to be a lot of information within this article, the options are not especially complex, and the team at AW Capital deals with acquisition finance daily.
If you are contemplating making use of acquisition finance to grow or expand your business, and want to discuss all of the various options available to you, book a free no-obligation consultation with our team of experts today Tel 0333 772 6165